Tough Times Ahead for the Corporates because of Macroeconomic Scenario

Maturing of Debt

Corporates all over the world face tough times ahead because of a number of factors. These include maturing of the debt that has to be repaid over the next year, falling prospect for growth and revival, and private equity financing coming due, which means that they would have to budget for this eventuality as well.

If we take the first aspect, corporates around the world and especially in China and India have taken on huge foreign currency loans in the heady days of the economic boom of the last decade. This debt is maturing in the next one year and has to be repaid in Dollars and Euros. This means that they have to budget for a huge outflow of Dollars, which is becoming increasingly difficult because countries like India already have seen their currencies take a hit and are facing shortfall in the amount of Dollar reserves that they have.

The situation in China is somewhat better in this respect as the country has huge Dollar reserves.

However, China is sitting on a time bomb of domestic debt that its corporates have accumulated over the last decade or so. This debt is partly the result of frenzied borrowing for expansion and partly the result of the extravagant stimulus that the government pumped into the economy after 2008.

Falling Growth, Rising Costs, and Short Term Liquidity Crunch

The second factor, which is to do with falling growth rates feeds into the first factor as in the absence of growth, it is not possible to repay debts because short-term liquidity crunch might result consequently. This is the reason why many corporates are sitting on huge cash reserves as then they would be in a better position to take care of debt repayments in case of falling revenues and rising costs.

Of course, this is not the case with all corporates and many of them are being taken over by stronger firms or are being declared insolvent by the banks and the creditors. This is the case with conglomerates like Kingfisher in India where banks and financial institutions have started the process of recovery of debts by attaching their assets. The alternative to this is governmental support or what are known as bailout packages like what was done in the United States with the government rescuing the corporates.

However, in India such packages are not yet the norm because of political and social factors. The situation in China is different, as the government has bailed out the corporate sector to a large extent.

The point to note here is that even when the governments’ bailout the corporates, the resulting debt has to be repaid and this is the scenario in China where corporates have large debt on their balance sheets.

Private Equity the coming Buyout of Corporates

The third factor is the coming private equity implosion. Private equity means that significant percentage of the stake in companies are held by these PE firms and where significant debt is held by them as well.

Again, this is something that is likely to mature over the next year or so where the PE firms and the debt owed to them would have to be repaid. Unlike in the two factors discussed above, this is more of a private_sector-to-private_sector interaction that might result in the buyouts of corporates by the PE firms and the investment banks. However, this buyout would result in negative consequences for the corporates, as the normal procedure in such cases is to hive off the unprofitable firms and sell them to others or the PE firms themselves taking over the businesses.

Concluding Thoughts

These three factors that have been discussed point to a scenario where the corporates have a problem on their hands in the next year or so. Of course, corporates being smart have already budgeted for these eventualities and the likely impact would be felt by the employees (first) and the shareholders (next).

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Managerial Economics